Chinese expert calls for urgent overhaul of interbank systems

The banking system in China operates on underlying transaction and risk management software developed mostly by foreign companies; some is considered outdated and a potential risk for a structure that is essentially the lifeblood of local banking networks

Chinese expert calls for urgent overhaul of interbank systems
Two women walk past China Development Bank in Shanghai. In 2019, Cameride and China Development Bank jointly formed a team of experts to tackle the core key technologies in the RMB bond system. File photo by EyePress via AFP.

(ATF) In recent years, the independent control of core computer software systems in key industries, especially the underlying core software, has become a hot topic in the investment field, and it is also the focus of continuous attention in the capital market. 

Ni Guangnan, an academic at the Chinese Academy of Engineering and a researcher at the Institute of Computing Technology of the Chinese Academy of Sciences, told Huangqiu, a leading party newspaper: “In the future, security technology will go deeper and deeper into the underlying system, into the underlying code, into the digital world, and guard the digital cyberspace security and stability, and build a solid foundation for a network power."

It is well known that banking systems are operating on what is now considered outdated systems.

In July 2020, the State Council issued a paper titled "Several Policies to Promote the High-Quality Development of the Integrated Circuit Industry and Software Industry in the New Era", which proposed 37 measures on eight aspects including finance, taxation, R&D, and talent. The People’s Daily also published a report last September on "Operating System Accelerating to Realize Autonomy and Controllability", which proposed "independent development of operating systems is a major and urgent issue. To achieve breakthroughs in core technologies, it is necessary for multiple parties to work together and coordinate research to create a better solution for innovation and creation".

All of this has prompted the industry to change its outlook to "purchasing instead of research", and gradually make great efforts in the independent research and development of domestic operating systems.

The operating system is a very broadly defined concept, involving many fields and industries. Each industry has a different foundation and requirements in terms of autonomous controllability of the operating system, which also makes the development path of independent and controllable systems in different industries different. To this end, Meng Jianghua, who has a PhD in Computer Application Technology of Tsinghua University and is R&D Director at Cameride Co Ltd, talked about the background and latest development of an independent and controllable capital transaction and risk management system. 

The "aorta" of financial operations

Different from the well-known cash deposit and withdrawal, fund transfer and other personal-oriented bank counter services, the fund transaction and risk management system serves the lower-level inter-institutional trading market, which does not overlap with ordinary individual users, but is very important to the huge financial backbone market.

Dr Meng Jianghua said that the interbank market is a market for transactions between various financial institutions represented by banks, including the interbank lending market, the bill market, the bond market, the foreign exchange market, and the precious metal market. It is the central position of the managers and participants in this market; the interbank market has the function of regulating currency circulation and money supply, regulating currency surpluses and shortages between banks, and maintaining and increasing the currency value of financial institutions. It is the currency supply of an entire society. The first layer of distribution platforms.

"In a sense, if you compare the financing and transactions of the whole society to the blood of a person, such as payment and settlement between enterprises and personal payment and settlement, you can compare it to the capillaries of a person, which penetrates and supports the normal operation of every part of the entire body; and the interbank market is like the aorta. The importance of continuously providing blood and nutrients to these capillaries is self-evident," Dr Jianghua Meng said in this analogy.

How big is the interbank market? According to Dr Meng Jianghua, what everyone is familiar with is the capital market, including stocks, corporate bonds, and other financial instruments. Everyone uses this market for investment and financial management. Funds, trusts and other financial institutions also use the capital market to invest and trade. The total value of the market is around 80 trillion yuan, while the overall scale of the interbank market is more than three times the capital market, with stock value in the trillions, and the total transaction volume is even in the trillions.

The capital transaction-and-risk-management system is the underlying operating system used by financial institutions to participate in the interbank market, which directly affects the security and timeliness of transactions, as well as the accuracy of transaction data, and is related to the security and operation of the financial system, its stability and sustainability.

Dr Meng Jianghua said: “Using the transportation industry as a metaphor, trading in the interbank market can be regarded as long-distance cargo transportation, and the capital transaction and risk management system is like a highway and freight railway network, which is a financial sector. 'Infrastructure construction', the safety, insecurity, convenience and inconvenience of 'road and railway' repairs are vital to the operation of the market and financial institutions."

The diversity, complexity and strict management requirements of financial transactions determine that this system is extremely professional – and difficult to construct. Up to now, most mainstream financial institutions such as domestic large and medium-sized banks have purchased large-scale mature products from foreign suppliers.

"Almost every system is a large-scale project with an investment of over tens of millions or even hundreds of millions of yuan, and only a few years of use authorisation is obtained for the product. After the authorisation expires, it needs to be purchased again. During the use of the system, it is necessary to pay expensive service fees every year..." Dr Meng Jianghua said. 

At present, the entire industry relies on foreign systems to manage hundreds of billions worth of financial assets, which showed the importance and urgency of researching and developing domestic capital transaction and risk management systems.

Technology defines the boundaries of banking

Large and medium-sized domestic banks generally adopt foreign management systems for underlying transactions for historical reasons: the global financial market, which was first developed by western nations, started earlier and has a larger volume, regardless of the type and scale of financial products. The complexity, the number and types of institutions involved in transactions, and the complexity and detail of various transaction agreements, market norms and regulatory rules far exceed those of developing countries and regions.

Dr Meng Jianghua, seen here, said: "The underlying operating system provided by industry software giants represented by American companies has generally undergone decades of market testing, and its maturity, stability and scalability have been verified by a large number of customers for long-term use. It has experienced the test of many major market events, whether it was the end of the Blington Woods system or Black Friday in 1989, and then to the subprime mortgage crisis in 2008, when extreme trading conditions appeared in the financial market, the underlying transaction system could still operate stably and efficiently.

"This kind of system performance that can cover global market differences, continue to expand in a large time span, and have the ability to deal with extreme situations requires not only strong technical support capabilities, but also system designers who have a high-level overall understanding of the financial business and a strategic forward-looking vision for the future development of the market and business.. How to integrate the various businesses that are as numerous as stars into a system framework, form a mutually coordinated overall mechanism and maintain stable and efficient operation for a long time. The ability to achieve functional evolution and smooth expansion on demand is the core technology and difficulty of this system."

It is unavoidable that finance is an important core competitiveness of the country, and financial security is an important part of national security, Meng said. "It is a strategic and fundamental thing related to the overall economic and social development of our country; a financial operating system and data stability and security are an important part of financial security. Under such a background, the autonomy and control of the underlying financial operating system is an unavoidable challenge, and it is also the direction of unremitting efforts of domestic financial operating system suppliers."

The underlying operating system is also different from its functional modules. The functional modules focus on a certain part of current business needs, and the cost of replacing them in the future is not great, while the underlying operating system is "infrastructure" erected as the foundation of all functional modules. Replacement basically means overturning and reconstructed the overall entity. Therefore, it needs to be highly forward-looking and able to predict future business development directions and large functional requirements of financial institutions, as well as allowing sufficient space for structural expansion and adjustment freedom.

"With the rapid development of science and technology today, technology and systems are not only followers and service providers of financial services, but also business leaders in many scenarios," Meng Jianghua said. "From another perspective, technological capabilities determine the high boundaries that business development can achieve. For many business innovations, whether they can be done and what scale and extent can be achieved are directly determined by technical capabilities and system functions; if the underlying operating system is poorly designed and has insufficient tolerance, it will inevitably affect the bank’s future business development forms and constraints."

Cameride

Take Cameride, as an example. Among the few domestic suppliers of capital transaction and risk management systems, it is the only one that has an international perspective, with the ability and experience to build overseas market systems, and multiple assets of more than one trillion yuan. A local supplier of successful cases of heavy-duty system design, R&D and implementation, its scope of service customers includes: the Industrial and Commercial Bank of China, China Construction Bank, Agricultural Bank of China, Bank of Communications, China Development Bank, Postal Savings Bank, Shanghai Pudong Development Bank, Bank of Ningbo, CITIC Securities, Huatai Securities, China Bond Credit Promotion Corporation, etc – about 70% of large and medium-sized financial institutions in China.

In 2019, Cameride and China Development Bank jointly formed a team of experts to tackle the core key technologies in the RMB bond system. The research results won the second prize of China Development Bank's scientific and technological progress (the indicators are ahead of foreign systems currently used by China Development Bank). Both parties plan, on the basis of the cooperative research model, to further deepen the cooperative relationship and promote independent research and development of the IT system of China Development Bank's financial market line.

In 2020, the experts and R&D team of Cameride, as the main partners, participated in a design and project construction of the blue core operating platform led by the CCB subsidiary of China Construction Bank. The project aims to undertake the construction of the CCB head office and a free trade zone, plus independent research and development and outsourcing system replacement of the fund back-end business operation platform of branches and all overseas branches. The first phase of the project was successfully launched in April 2021 (the second phase of work has been carried out simultaneously), and the back-end business operation supports trillions of assets in CCB's financial market business and has gradually ended its dependence on foreign products.

Dr Meng Jianghua said: "Cameride's operating system and design scheme can be recognized by large financial institutions, and it is inseparable from the team composition and development history of Cameride. The company team has gathered a first batch of top domestic experts engaged in the construction of capital transactions and risk management systems. It includes core members of the Chinese implementation team for foreign heavy-duty products, the core backbone of the domestic market benchmarking team, and senior experts from the world’s top financial data service providers. Since 2001, Cameride has been part of the international mainstream entering the Chinese market with product supplier cooperation, deeply participating in the consulting, construction, and long-term maintenance of the capital management system of most large and medium-sized banks. In this process, Camride not only deeply understood the architecture ideas and computing characteristics of foreign systems, but also gradually gathered and cultivated its own technology and business team, and after long-term continuous R&D work and resource investment, we could create industry-leading product lines and solutions.”

He concluded: “It can be said that the product growth of Cameride, it started from 'on the shoulders of giants'."

On March 4, 2016, a non-profit social organisation named the "Information Technology Application Innovation Working Committee" was initiated and established by 24 units engaged in the research, application and service of key software and hardware technologies. Then on January 9, 2019, the Safe and Reliable Technology and Industry Alliance officially became the Safe and Reliable Working Committee of China Electronics Industry Standardisation Technology Association, otherwise known as the "Encore Committee". Cameride is one of the members of the "Encore Committee".

Respect the different characteristics of bank customers

It must be realised that an autonomous and controllable capital transaction-and-risk-management system, and a localised replacement of the underlying transaction system in the financial industry is not something that can be accomplished overnight. There is still a long and difficult road to go. Meng Jianghua said: “Aside from R&D work, the switching actions of a bank’s underlying capital transaction system is also a complex, difficult and high-risk system project, because the business cannot be stagnated, both the underlying system and a large number of peripherals. The system group is always in a state of dynamic change, and a large amount of business data is refreshed and circulated in the system group at all times. It is necessary to ensure seamless connection and a smooth transition of the business process, operation logic, data content and state before and after the system switch. The difficulty is it's like replacing the engine of a moving high-speed rail train, which puts extremely high requirements on the capabilities and experience of the system supplier."

In this field, domestic system suppliers also have their own advantages. For example, foreign systems often have the problem of what is "acceptable", which is prominently reflected in the understanding of business varieties with Chinese characteristics, market rules, and unique management culture within financial institutions. Insufficient and functional support is "grounded", as well as the demand differentiation for domestic financial institutions of different types, sizes, and regions, as well as a lack of thorough understanding of value. This provides local system suppliers with compensation for international software giants, plus the opportunity of congenital deficiencies.

How can we seize this opportunity to accelerate the process of independent research and development in this field? In this regard, Meng Jianghua also put forward four suggestions:

"First of all, we must fully realize that the replacement of the underlying system is a systematic project that affects the overall operation of the organisation, which requires customers to conduct in-depth analysis of current needs and future development strategies to form a long-term overall plan for independent research and development.

"Secondly, we should fully learn from the successful experience of international software giants, deeply analyse and learn to understand foreign mature bottom operating systems, and form an accurate and comprehensive macro-cognition of such systems’ positioning boundaries, top-level logic, design methodology, etc, and avoid strategies' blind spots, and reduce trial and error costs."

"The third is to pay attention to the simple imitation of mature foreign products. It is necessary to fully consider the business peculiarities and differentiated needs of the Chinese market and customers to achieve better design of localised applications. This is also the case for domestic system suppliers compared to international software, which is the main advantage of the giants.

"Finally, we must pay attention to the connection and integration of new and old systems to ensure a smooth transition of customers in the process of system replacement and business continuity. This requires a full understanding of the operating foreign systems and an experienced implementation team."

Finally, Meng Jianghua also noted that the current mainstream operating system suppliers in the domestic exchange market such as Hang Seng, Jinzheng, and Win Times are all listed companies.

The development of a company is greatly assisted by the capital market, regardless of brand influence. The company’s team size and financial strength have been qualitatively improved, which has greatly promoted the development and maturity of the IT system. Therefore, the domestic exchange market business has a very low degree of dependence on international system suppliers. The accelerated development of domestic suppliers of the system provides a model for reference, he said.

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China Banking network software transaction and risk management Cameride Dr Meng Jianghua China Development Bank Interbank systems foundation software